We are beginning to sense clients are becoming a bit anxious about the Coronavirus outbreak and what impact this may have on share markets and in-turn on your investments which you rely on to fund your lifestyle and retirement.
The main few points I want to relay and have been explaining to our clients so far are:
- Remember the long game – we have seen events like this before (GFC, SARS) and from our experience the clients that patiently wait and don’t panic are the ones that are better off in the end.
- We can’t time the market – If we try and pick when to exit and buy back into the market you will be worse off even if you only miss out on a few good days in the market.
- Don’t listen too much to the media – the media’s job is to make sure they sell headlines and they tend to turn a bad situation into something even worse.
- We can only control what we can control – we can’t control the media or the markets, but what we can control is making sure we have a robust way to select the fund managers your money is invested with.
As you may recall we teamed up with an investment manager, Zenith Investment partner’s about 2 years ago. The function of Zenith is to give investment advice and to construct portfolios for our clients. So far we have had great success and our clients are loving this solution.
Zenith sent myself an update about the Coronavirus on Friday afternoon that I want to share with you all. This is based on real data and hopefully can give you some peace of mind during this time. Please see below for Zenith’s Coronavirus Update.
Regards,
Aaron Kane
Financial Adviser & Managing Director
EK Financial Group
Coronavirus Update from Zenith
Due to the recent outbreak of the Coronavirus (COVID-19) causing ripples in the global economy, we believe it’s important for investors to understand the potential implications of a pandemic on markets.
Prior to this week, markets seemed to overlook the potential impact of the Coronavirus on the global economy. However, following a large increase in cases outside of China, we have seen a sharp drop in both global share markets and bond yields. The following table shows the returns of the major asset classes from 24 February – 2 March 2020*:
| Asset Class** | Return |
| International Equities | -11.44% |
| Australian Equities | -9.57% |
| Listed Infrastructure | -10.53% |
| Listed Property | -11.47% |
| Australian Fixed Interest | 0.64% |
| International Fixed Interest | 0.76% |
Source: Bloomberg
*Index values derived from Bloomberg as at 10am (AEST) 2nd March 2020
**Asset Class Returns are derived from the following indices: International Equities – MSCI World ex-Australia (AUD Hedged), Australian Equities – S&P/ASX 300, Listed Infrastructure – FTSE Global Core Infrastructure 50/50 (AUD Hedged), Listed Property – FTSE EPRA/NAREIT Developed Index (AUD Hedged), Australian Fixed Interest – Bloomberg AusBond Composite Index, International Fixed Interest – Bloomberg Barclays Global Aggregate Index (AUD Hedged)
What can we expect?
Many parallels can be drawn between the current situation and the 2003 outbreak of Severe Acute Respiratory Syndrome (SARS), where global markets (as represented by the MSCI World $A) declined by 14% within two months. Once fears of the virus abated, markets recovered the losses within two months, as shown in the chart below.
Source: Bloomberg, MSCI
Investors who sold out of equities at the height of the SARS hysteria were left behind when markets rebounded strongly. In fact, in the eight months following the bottom of the market, equities rallied approximately 35%, finishing 15% higher than they began at the start of the drawdown on the 14th January.
Similarly, we believe that, if the Coronavirus can be contained, markets will recover and those who remain invested will be rewarded for their patience. Investors are often tempted to time these movements i.e. employ tactical asset allocation to go to cash. However, doing so requires near-perfect timing, not only on the exit but also on the re-entry (this ignores transaction and tax costs). Missing only a few days in the market can dramatically impact your longer-term returns.
Source: Bloomberg
Source: Bloomberg
Is it different this time?
As negativity surrounds the Coronavirus in media headlines, investors could be forgiven for expecting the worst. However, there are key differences between the current Coronavirus outbreak and SARS, which could bode well for the global economy and markets. Although the Coronavirus appears to be more contagious, it has so far had a materially lower mortality rate at 3% compared to SARS’s 11%, according to the World Health Organization.
Economic repercussions are expected to be more severe this time, especially considering the increased importance of China to the global economy now in comparison to 2003. However, China has pledged to support its economy with fiscal and monetary stimulus in response to the outbreak, with the intention to keep the economy buoyant.
What does this mean for portfolios?
It’s during periods of sustained equity market stress where we expect other parts of our portfolio to buffer returns, whether it be Fixed Income, Alternatives, Listed Real Assets or even some of our more defensively placed equity managers. We intentionally recommend a well-diversified portfolio, both across and within asset classes, that have “multiple ways of winning”. Portfolios aren’t positioned to be reliant on a narrow set of outcomes, given the unpredictable nature of markets.
In addition, while active management has struggled in recent years due to buoyant markets, these types of sell-off events generally favour active investing. Active managers can respond to market stress to either protect or take advantage of market dislocations.
While we caution that there is still much uncertainty regarding the Coronavirus and its impact on global markets, we firmly believe that remaining invested through increased market uncertainty, high-quality active management and appropriate diversification remain the key to strong long-term risk-adjusted returns.
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